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RBI actions stem rise in govt bond yields

RBI actions stem rise in govt bond yields
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First Published: Tue, Mar 03 2009. 01 15 AM IST
Updated: Tue, Mar 03 2009. 11 37 AM IST
Mumbai: The Reserve Bank of India’s (RBI) decision to repurchase up to Rs9,000 crore of debt from investors this week has eased pressure on the bond market, recently weighed down by concerns of a glut in government bond sales.
RBI said on Friday it will buy back Rs6,000 crore of bonds on 5 March, with an option to raise the size of the purchase by 50%, in a so-called open market operation aimed at capping bond yields, which move in opposite direction to price.
The buy-back of existing debt precedes the sale of Rs12,000 crore of government bonds on 6 March.
The bond market has been fretful of an oversupply of debt as the government seeks to bridge its fiscal deficit by borrowing an additional Rs46,000 crore before the end of the fiscal year.
Of the amount targeted, the government has already borrowed Rs12,000 crore. Primary dealers—who buy and sell government debt directly and underwrite bond auctions—had to buy about Rs1,400 crore of those securities after RBI rejected high-yield bids.
Bond yields had been rising on concerns of oversupply and the government’s widening fiscal deficit.
On Monday, bonds rose for a third day, pushing yields down in their longest winning streak in more than a month, lifted by the central bank’s plan to buy existing debt.
The yield on the most-traded note due 2018 dropped to a two-week low, fuelled as well by speculation that slowing economic growth and inflation will allow RBI to lower interest rates for a second time this year.
“The central bank is giving support to investors in managing the government’s additional debt sales,” said Baljinder Singh, a fixed-income trader at Andhra Bank in Mumbai. “I am expecting yields to soften.”
The yield on the 8.24% note due April 2018 slid five basis points to 6.29%, according to the central bank’s trading system. The price rose 0.35, or 35 paise per 100 rupee face amount, to 113.35. One basis point is one-hundredth of a percentage point.
RBI’s move to transfer Rs45,000 crore of intervention bonds to the government’s books to avoid overburdening the bond market with debt sales has also lifted sentiment. These bonds were issued under the so-called market stabilization scheme to drain out excess liquidity from the system.
The central bank is to conduct an open market operation one day before every auction to ensure the borrowing programme goes off smoothly.
RBI recently had a meeting with the Primary Dealers’ Association, an industry lobby that wants the central bank to intervene aggressively in the market through its buyback operations.
“RBI steps are positive enough,” said S.S. Raghavan, head of treasury at IDBI Gilts Ltd. “However, we need to see how the open market operation is conducted.”
RBI will specify the tenure of the securities it wants to buy on Wednesday. “I think RBI will buy back the most-traded nine-year paper this time in OMO (open market operation) so that the new benchmark is released in the system without hampering the appetite,” said J. Moses Harding, executive vice-president and head (wholesale banking group) at IndusInd Bank Ltd.
The outstanding amount in the most-traded bond is about Rs47,000 crore. Compared with this, the outstanding amount in the 10-year benchmark is only Rs10,000 crore.
Expectations of a rate cut by RBI are also gaining pace following the drop in the third-quarter economic growth rate to 5.3% against consensus estimates of 6.1%. In the year-ago period, the economy expanded by 8.9%.
Wholesale prices, the main gauge of inflation in India, rose 3.36% in the week ended 14 February, from a year earlier, the smallest increase in almost 15 months, also reinforcing expectations of a rate cut.
RBI left its rates unchanged in its January policy review after cutting its key policy rates by 100 basis points each in early January. Since October, RBI has reduced its repo rate, or the rate at which it injects liquidity in the system, by 350 basis points to 5.5% and the reverse repo rate, or the rate at which it sucks out liquidity from the system, by 200 basis points to 4%.
Stand-in finance minister Pranab Mukherjee has pegged the government’s gross market borrowing at Rs3.62 trillion in fiscal 2010. This will go up by Rs30,000 crore following a cut in service tax and excise duties announced last month.
Primary dealers may have to buy more of unsold government bonds at auctions in the coming days—a process known as devolvement—if the market is not able to absorb them, dealers say.
Anoop Aggarwal of Bloomberg contributed to this story.
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First Published: Tue, Mar 03 2009. 01 15 AM IST